The Corporate Sustainability Reporting Directive (CSRD) will require nearly 50,000 EU companies to disclose their impact on the environment, so consumers and investors can make sustainable choices. Here’s what the CSRD is, which companies have to comply with CSRD, and how to achieve CSRD compliance.
What is the CSRD?
A new standard for EU sustainability reporting
The Corporate Sustainability Reporting Directive (CSRD) will set the standard by which nearly 50,000 EU companies will have to report their climate and environmental impact.
Proposed by the European Commission in April 2021, the CSRD will replace and build on the Non-Financial Reporting Directive (NFRD) by introducing more detailed reporting requirements and expanding the number of companies that have to comply.
Setting a higher bar
Put simply: the EU believes that consumers and investors deserve to know the sustainability impact of businesses, and the CSRD was created because the existing legislation wasn’t cutting it.
Before the CSRD, the Non-Financial Reporting Directive (NFRD) established the reporting principles for large companies. However, the European Commission discovered that the information reported by companies was insufficient:
“Reports often omit information that investors and other stakeholders think is important. Reported information can be hard to compare from company to company, and users of the information are often unsure whether they can trust it.” – The European Commission.
The European Commission reports that low-quality sustainability reporting can have cascading effects, particularly in regards to promoting sustainable investments. To ensure the market for green investments is credible, investors need a clear picture of their investment portfolio’s sustainability impacts. And even investors who aren’t particularly motivated to invest in green companies still need to meet the disclosure requirements of the Sustainable Finance Disclosure Regulation (SFDR).
The European Commission also cited the “accountability gap” in its reasoning for proposing the CSRD:
“High quality and reliable public reporting by companies will help create a culture of greater public accountability.” – The European Commission.
And so the CSRD was created, with the goal of improving disclosure and providing the data investors need when determining a company’s sustainability.
Though it’s an EU directive, the CSRD also applies to companies based abroad who have a presence in the EU.
This means that a hypothetical U.S.-based company with dozens of subsidiaries has to abide by the CSRD if even one of those subsidiaries is in the EU.
Impacts inward & impacts outward
The CSRD – like the NFRD – requires “double materiality,” which means that businesses will have to disclose not only the risks they face from a changing climate, but also the impacts they may cause to the climate and to society.
For businesses who have historically only analyzed the risks posed to them by climate change – and neglected the role they played in changing the climate – this is a call to do some self-reflection.
Better comparability through standardization
The CSRD will require company sustainability data to be submitted in a standardized digital format.
This is meant to provide a clear format for company sustainability reporting – which is currently rife with many idiosyncratic formats – allowing for better understandability and easier comparison between companies.
Which companies have to comply with the CSRD?
The CSRD more than quadruples the number of companies required to report on sustainability, from the 11,000 covered by the NFRD to the nearly 50,000 that will be covered by the CSRD.
Large companies – even ones based outside of the EU
Companies meeting two of the following three conditions will have to comply with the CSRD:
- €40 million in net turnover
- €20 million in assets
- 250 or more employees
In addition, non-EU-based companies with subsidiaries in the EU must comply with CSRD, as well as companies that are not established in the EU but have securities on EU-regulated markets (except listed micro-enterprises).
Small and medium enterprises (SMEs)
The CSRD doesn’t place any new reporting requirements on small companies, except for those with securities listed on regulated markets. And to make it easier for listed SMEs, they can report using simplified standards.
But while the CSRD doesn’t apply to non-listed SMEs, the European Commission has also proposed developing separate standards that non-listed SMEs could voluntarily use. These standards would be scaled to fit SMEs’ capabilities and would make it easier for SMEs to report information to banks, clients, and investors – helping SMEs play their role in the transition to a sustainable economy.
How to comply with the CSRD
Companies will need to disclose the sustainability information in their management reports, which means that financial and sustainability information will be published at the same time.
This sustainability data will have to be submitted in a standardized digital format, to allow for easier checking and comparison in the European single access point database.
The submitted data will then be subject to “limited third-party assurance,” meaning that an auditor will need to evaluate the data.
When will the CSRD go into effect?
The European Commission plans to adopt the CSRD in late 2022.
A preliminary set of standards will most likely be adopted in October 2022. A second set of complementary standards will be adopted by October 2023, which will include sector-specific information.
Companies will likely need to start reporting to the new sustainability reporting standards in 2024, using the information from the 2023 financial year.
Start taking action now
Though 2024 may feel far away, the sooner your company begins planning for meeting CSRD requirements, the easier time you’ll have when they go into effect.
And it’s not just the CSRD – many governing bodies are considering mandatory sustainability reporting. Taking time now to prepare your measuring and reporting will keep you ahead of the curve as new regulations are put in place.
Signing up now to Normative’s emissions accounting engine will give you the detailed information you’ll need to prepare compliant climate impact reports – as well as the insights you need to start your journey toward net zero emissions!
Normative helps you become CSRD-compliant
Normative’s carbon accounting engine uses millions of data points to calculate your company’s climate impact – but that’s just the start.
Our sustainability experts will also help you achieve compliance with reporting requirements like the CSRD, and guide you toward achieving net zero emissions.